SATS Ltd - Tired bull
- In the search for cyclicals, SATS may be out of favour after its outperformance in 2016 as growth momentum stablises.
- At 21x CY17 P/E, it is trading at +2s.d above mean.
- Maintain Hold with an unchanged target price (S$4.95), still based on blended valuations of DCF (WACC:7.6%) and 19x CY18F P/E.
Watchful of fluctuating yen
- SATS’s 2Q17 net profit was partially lifted by translation profits from TFK Japan, although Delta’s contract would have improved some meals volume.
- The downward trend in the yen from Sep 16 could result in a flat hoh 2H17, disappointing the market’s expectations as SATS had been delivering five consecutive hoh earnings growth.
Can Changi continue to exceed expectations?
- Changi’s passenger growth in 2016 benefited from the strong yoy increase in tourist arrivals. We are projecting a 5-6% yoy revenue growth for SATS on the back of rising tourist numbers and passenger throughput at Changi.
- There is a risk of an earnings miss if either of these numbers fail to materialise.
Terminal 4, SingPost, Amazon and new kitchen in Shanghai
- SATS is a long-term growth story. The opening of Changi’s Terminal 4 may not see an immediate surge in operating statistics as only AirAsia and Cathay Pacific will be moving to there.
- The partnership with SingPost in airmail consignment handling services could leverage on the SingPost-Alibaba ecommerce linkage.
- Cargo volume could see some uplift from Amazon’s presence in Singapore.
- The partnership with Wilmar to build a kitchen near Shanghai could contribute in the long run.
- Management has guided that the final DPS will track 2H17's performance. We see little upside to our S$0.16 FY16F DPS unless volume growth surprises on the upside.
- We believe SATS’s current valuation of 21x forward P/E (1 s.d. above 10- year mean) is fair on the back of its 7% earnings growth p.a.
- Re-rating catalysts for the stock could come from stronger-than expected margins and Changi volume.
- A key risk is a general slowdown in air traffic within Asia.